Retail Sales Surge

Mortgage markets remained sensitive to movements in energy prices this week. Optimism surrounding a potential agreement to ease tensions in the Middle East helped push oil prices down to their lowest levels since March, reducing inflation concerns. The Fed meeting created volatility over two days but had little lasting impact. In addition, the reaction to a stronger than expected consumer spending report was muted. As a result, mortgage rates ended the week slightly lower. 

As expected, the Fed left the federal funds rate unchanged on Wednesday, and the language favoring an easing as the next move was removed. Investors focused mainly on the latest "dot plots" which reflect individual officials' forecasts for future interest rates. In his first meeting as the new Fed Chair, Kevin Warsh declined to submit a dot plot, describing them as unhelpful for conducting monetary policy. The dot plots from the other 18 officials were split, with nine projecting at least one rate hike this year, eight no change, and one anticipating a rate cut. This was more hawkish (in favor of tighter monetary policy) than had been expected. Investors now have priced in one 25 basis point increase in the federal funds rate by the end of the year. 

Categories most responsible for the strength this month included furniture stores, auto dealerships, and online retailers. Retail sales were a powerful 6.9% higher on a year-over-year basis, far outpacing both price increases and wage gains over that period. Supported by stock market gains, upper-income households continue to purchase at a rapid pace, while lower-income consumers are cutting back discretionary spending to focus on necessities. With the extra juice from tax refunds fading and the savings rate at a four-year low, investors will be keeping a close eye on spending trends in the coming months.

Looking ahead, attention will remain fixed on the conflict in the Middle East and the proposed deal to ease tensions. Investors also will monitor comments from Fed officials about future monetary policy. For economic data, New Home Sales will come out on Wednesday. Personal Income and the PCE price index, the inflation indicator favored by the Fed, will be released on Thursday.